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FORM 10-K

Commission File Number: 0-22885

TRIPATH IMAGING, INC.

780 Plantation Drive, Burlington, North Carolina 27215

Registrant’s telephone number, including area code: (336) 222-9707

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES x  NO o

      The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2002 was: $98,992,264.

      There were 37,537,940 shares of the registrant’s Common Stock outstanding as of March 19, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive proxy statement of the Registrant for the Registrant’s 2003 Annual Meeting of Shareholders to be held on May 22, 2003, which definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year of December 31, 2002, are incorporated by reference into Part III of this Form 10-K.

TriPath Imaging, Inc.

Table of Contents

As used in this report, the terms “we,” “us,” “our,” “TriPath Imaging” and the “Company” mean TriPath Imaging, Inc. and its subsidiaries, unless the context indicates another meaning.

Note Regarding Trademarks

AutoCyte®, AutoCyte Quic®, AutoPap®, CytoRich®, ImageTiter®, PapMap®, PrepMate®, SlideWizard®, and TriPath Imaging® are registered trademarks of TriPath Imaging®, Inc. TriPath Care Technologies™, i³ Series™, FocalPoint™, PrepStain™, SurePath™, and TriPath Oncology™, are trademarks of TriPath Imaging, Inc. All other products and company names are trademarks of their respective holders.

PART I

Item 1.     Business

      This Annual Report on Form 10-K contains forward-looking statements, including statements regarding our results of operations, research and development programs, clinical trials and collaborations. Statements that are not historical facts are based on our management’s current expectations, beliefs, assumptions, estimates, forecasts and projections. These forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that could cause actual results to differ significantly from those discussed in these forward-looking statements. Important factors that could cause or contribute to these differences include those described in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and in “Factors Affecting Future Operating Results” attached hereto as Exhibit 99.1 and incorporated by reference into this Form 10-K. You should not place undue reliance on the forward-looking statements, which speak only as the date of this report. We undertake no obligation to update these statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events, except as required by law.

      The Company’s Internet website is www.tripathimaging.com. Information on the Company’s website is not a part of this Form 10-K. The Company makes available free of charge on its website, or provides a link to, all of the Company’s Forms 10-K, 10-Q and 8-K, and any amendments to these, that are filed with the SEC. To access these filings, go to the Company’s website and click on “Investor Resources,” then click on “SEC Filings.”

The Company

      We create solutions that redefine the early detection and clinical management of cancer. Specifically, we develop, manufacture, market, and sell proprietary products for cancer detection, diagnosis, staging, and treatment selection. We are using our proprietary technologies, and know-how to create an array of products designed to improve the clinical management of cancer. We were incorporated in October 1996 as AutoCyte, Inc. and changed our name to TriPath Imaging, Inc. in September 1999 in connection with the merger of AutoCyte, Inc. and NeoPath, Inc. and acquisition of the technology and intellectual property of Neuromedical Systems, Inc. We were created to leverage the complementary nature of the products, technologies, and intellectual property developed by our predecessor companies, all of whom were early pioneers in the application of computerized image processing and analysis to detect the often subtle cellular abnormalities associated with cancer and its precursors. To date, we have developed and marketed an integrated solution for cervical cancer screening and other products that deliver image management, data handling, and prognostic tools for cell diagnosis, cytopathology and histopathology. We have created new opportunities and applications for our proprietary technology by applying recent advances in genomics, biology, and informatics to develop new molecular diagnostic and pharmacogenomic products and services for malignant melanoma and cancers of the cervix, breast, ovary, and colon.

      We are organized into two operating units:

	•	Commercial Operations, through which we manage the market introduction, sales, service, manufacturing and ongoing development of our products; and
	•	TriPath Oncology, our wholly-owned subsidiary, through which we manage the development of molecular diagnostic and pharmacogenomic products and services for cancer.

      We provide financial information by segment and geographic area in Note 8 to our Consolidated Financial Statements. We are incorporating that information into this section by reference.

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Commercial Operations

      During 2002, we adopted the trademark “TriPath Care Technologies” to describe our commercial product offerings and to communicate the broad nature of our corporate vision and the value created by our growing product portfolio, including the “i³ Series” and SlideWizard product lines.

      To further refine our market positioning and to enhance brand awareness among our customers, we have re-branded our cervical cancer screening products under the “i³ Series” product line. Our “i³ Series” product line for cervical cancer screening is the first integrated system for the collection, preparation, staining and computerized analysis of conventional Pap smears and liquid-based, thin-layer slide preparations. Our “i³ Series “ product line includes the following:

	•	SurePath Test Pack is a proprietary, liquid-based cytology sample collection, preservation and transport system. The SurePath Test Pack addresses errors in cell sample collection and slide preparation while providing a liquid medium for performing additional laboratory tests. The SurePath Test Pack was approved by the United States Food and Drug Administration (“FDA”) for slides prepared using the PrepStain Slide Processor in June 1999. In 2001, SurePath was approved by the FDA for manual slide processing in which the cell suspension is layered onto the slide and stained by a cytotechnician.
	•	PrepStain Slide Processor is an automated slide preparation system that produces slides with a standardized, thin layer of stained cervical cells. The PrepStain Slide Processor reduces the complexity of interpretation by providing a homogeneous, more representative and standardized thin layer of stained cells and a liquid medium for adjunctive laboratory testing of specimens. The FDA approved PrepStain in June 1999. In early 2003, we introduced a minor modification to the PrepStain slide processor that enables the system to be used either for cell transfer, slide preparation and staining, or for the cell transfer and preparation of slides that may be further processed using a laboratory’s free standing automated slide staining system. This minor modification should provide more flexibility and facilitate the integration of the PrepStain system into laboratories whose workflow is organized around a free standing automated slide staining system. The PrepMate system, an accessory to PrepStain, is designed to automate several steps in the preparation of SurePath thin-layer slides. PrepMate automatically mixes and removes the specimen from the SurePath preservative fluid vials, and layers the specimen onto the SurePath density reagent in a test tube for automated slide preparation and staining. The FDA approved the PrepMate accessory in May 2001.
	•	FocalPoint SlideProfiler is a computerized imaging system that uses proprietary technology to automatically screen SurePath or conventionally prepared Pap smear slides. The FocalPoint Slide Profiler can identify those slides that have the highest likelihood of abnormality. Formerly known as the AutoPap Primary Screening System, FocalPoint was approved by the FDA as the first and only automated device for primary screening of conventional Pap smear slides for cancer of the cervix and its precursors in May 1998. In October 2001, FocalPoint was approved by the FDA to screen SurePath thin-layer slides. FocalPoint with Location Guided Screening (FocalPoint GS), the next generation FocalPoint system, was introduced outside of the U.S. in the fourth quarter of 2000. FocalPoint GS integrates our proprietary Slide Wizard technology into the FocalPoint screening process and automates the microscopic analysis of cervical smears designated for further review by the FocalPoint slide profiler. In early 2003, we initiated a multi-center clinical trial to collect data to support a Pre- market Approval (“PMA”) supplement application for the FocalPoint GS employing an investigation plan that is the subject of a binding agreement with the FDA.

      Our SlideWizard product line includes the Image Titer, an FDA cleared method for automating the measurement of antinuclear antibody, research applications for DNA, immunohistochemical quantification, cellular analysis, and expression quantification, a system for the transmission and interpretation of tissue specimens via remote telecommunications, or “telepathology,” and a software based storage and retrieval system for microscopic images.

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TriPath Oncology

      Our TriPath Oncology business focuses on developing and commercializing molecular diagnostic and pharmacogenomic tests for a variety of cancers. On July 31, 2001, we entered into a series of agreements with Becton, Dickinson and Company (“BD”) to develop and commercialize molecular diagnostics and pharmacogenomic tests for malignant melanoma and cancers of the cervix, breast, ovary, colon and prostate as part of the ongoing strategic alliance between BD and Millennium Pharmaceuticals, Inc. (“Millennium”).

      Historically, the cancer diagnostics market has relied on tests or methods that identify surrogate markers or cellular abnormalities that are correlated with the presence or stage of disease, but provide limited information specific to the disease or patient outcome. In recent years, however, significant advances have occurred in the analysis and characterization of cancer from a molecular mechanistic perspective. Information derived from the analysis of gene and protein expression differences is providing new insights into the biology of cancer and is driving the discovery of novel molecular markers which correlate to the presence and stage of cancer and to patient outcome. The goal of our molecular oncology program is to utilize these new discoveries in genomics and proteomics research to develop and commercialize diagnostic and pharmacogenomic tests to improve the early detection and clinical management of cancer. Specifically, we have active programs in development designed to identify individuals with cancer at the earliest possible stage of the disease, provide individualized predictive and prognostic information, guide treatment selection for patients with cancer, and predict disease recurrence. The core products and services we are developing through our collaboration with BD will be based upon genomic and proteomic markers identified through discovery research, conducted at Millennium, under its existing research and development agreement with BD. TriPath Oncology will clinically validate and develop these proprietary cancer markers into commercial diagnostic and pharmacogenomic oncology products and services. Commercial responsibilities for any resulting products will be shared between BD and TriPath Oncology. BD will continue to fund additional discovery research activities at Millennium at least through the end of their agreement in early 2004.

      The key components of our product development strategy are as follows:

      1. Identify and validate novel molecular marker panels based upon predetermined clinical specifications. The core products and services we are developing through our collaboration with BD will be based upon genomic and proteomic markers identified through discovery research, conducted at Millennium, under its existing research and development agreement with BD. Utilizing its proprietary technology and know-how in genomics and bioinformatics, Millennium has correlated the presence of specific genetic sequences (i.e., molecular markers) with a series of clinical specifications for each of our targeted cancers. These clinical specifications are based upon current unmet clinical needs and what we perceive to be a significant commercial opportunity. Since it is generally accepted that cancer onset and progression are driven by multiple inter-related genetic changes, our molecular assays will consist of panels of molecular markers which will yield molecular profiles, known as signatures descriptive of clinical phenotype and patient outcome.

      2. Format our molecular assay technology into universally accepted laboratory assays. Our goal is to change clinical practice, not laboratory practice. Therefore, all of our assay technologies will be developed in commercially accepted formats to facilitate rapid laboratory adoption. The technology format selection is dependent upon sample type. For early detection assays, we have chosen an immunoassay format that is capable of detecting and quantifying multiple secreted proteins in blood. Staging and prognostic assays will require the quantification of molecular markers (proteins) within the context of cellular morphology, and as such, these assays will be formatted in a standard immunohistochemistry (“IHC”) assay with colorimetric bright-field detection. Both formats are based on the detection and quantification of specific proteins and will thus require us to generate monoclonal antibodies targeted to each unique protein. We do this by first translating the unique gene sequences identified by Millennium into proteins using a number of protein expression systems, then developing monoclonal antibodies specific to each protein through standard hybridoma technology. After each monoclonal antibody marker is independently validated using clinical samples with known patient outcome, a marker panel will be assembled to achieve the desired assay sensitivity and specificity.

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      3. Link the staging and prognostic assays to our proprietary image analysis technology. We believe that in many cases clinical outcomes are determined by subtle differences in gene or protein expression, and that these subtle differences in gene and protein levels will require advanced imaging capability for quantification and interpretation. Furthermore, we believe that tissue architecture, cell morphology, and precise sub-cellular localization of molecular markers will be an important tool for accurate cancer staging and prognosis. Therefore, we intend to adapt our proprietary image analysis platform to our molecular assays to allow analysis and quantification of multiple, discrete molecular markers within the context of tissue distribution and cellular location.

      We introduced our first analyte specific reagent (“ASR”) which was used in a laboratory developed assay for malignant melanoma in the fourth quarter of 2002 through our collaborative agreement with AmeriPath, Inc., a leading national provider of cancer diagnostics, genomics and related information. In the third quarter of 2002, we completed marker discovery and initiated development work for molecular assays for cervical and breast cancer. We are actively translating unique gene expression patterns or markers provided by Millennium into proteins and monoclonal antibody reagents for adaptation into universally accepted commercial testing formats and have initiated pre-clinical validation studies. We anticipate introduction of ASRs for laboratory developed tissue and cell based assays for staging of cancer of the cervix and breast in late 2004.

      We have completed development of a prototype version of our imaging platform to facilitate assay development. The proprietary imaging platform consists of four major components. The Asset Tracking component is used to register and track all clinical samples used in the development of our molecular assays, and to manage the slide images and data created from the samples. The Automated Slide Scanner component provides high throughput slide handling and scanning capability, and produces high-resolution digital images of cells and tissue stained with our molecular markers. These images can then be evaluated interactively by cytotechnologists and pathologists via the Viewer component of the platform. The Quantification component uses innovative, proprietary algorithms to analyze the digital slides, providing quantitative measurements for each different molecular marker on the slide. While the primary utility of this imaging platform today is to support our product development activities, we have already begun the process of adapting this technology to a commercial product which will ultimately be linked to our molecular assays.

      We are also leveraging our proprietary imaging technology to develop new collaborations to expand our commercial opportunities. In early 2003, we entered into an agreement with Bristol-Myers Squibb Company (“BMS”) to provide quantitative tissue based image analysis in support of their oncology therapeutics programs targeted at treating epithelial cancers, including cancer of the cervix, breast and colon. We are utilizing our SlideWizard image analysis platform and proprietary software applications to provide a quantitative assessment of tumor marker expression levels from tissue samples provided by BMS for patients enrolled in a Phase I clinical trial. The data generated by our work will be used to evaluate patient response across varied dosing levels based on changes in tumor marker expression levels, both before and after treatment.

      We believe that our proprietary assets and technologies in imaging analysis, our broad access to novel molecular markers offered by our relationship with BD and Millennium, and our in-house expertise and capability in rare reagent and assay development will provide us with the necessary technology and expertise to successfully develop improved diagnostic oncology products. We further believe that the management of TriPath Oncology as a separate business unit provides a focused organization and dedicated management team with top-notch skills and expertise in assay formatting and development to deliver new oncology products to our commercial team which will dramatically improve the early detection and clinical management of cancer.

The Cancer Market

      Cancer is a chronic and complex disease characterized by uncontrolled growth and spread of abnormal cells. According to the World Health Organization (“WHO”), the worldwide incidence of cancer in the year 2000 exceeded 10 million cases, excluding basal and squamous cell cancers of the skin. The WHO further estimates that approximately 6.2 million deaths worldwide were attributable to cancer in 2000. In the United

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Women’s Cancers

	Source: American Cancer Society

      Treatments for cancer are expensive and oftentimes ineffective. Current treatments for cancer include surgery, radiation, and chemotherapy. Surgery is limited in its effectiveness because it treats the tumor at a specific site and may not remove all the cancer cells, particularly if the cancer has spread. Radiation and chemotherapy can treat the cancer at multiple sites but can cause serious adverse side effects because they destroy healthy cells and tissues as well as cancer cells. The ACS projected that in 2002 over 250,000 women died of cancer-related illness. Detecting cancer at the earliest possible stage of disease is critical to patient survival and outcome as reflected in the following five-year relative survival rates:

Five Year Disease–Free Survival

	Source: American Cancer Society

      Development and utilization of modalities for routine cancer screening is critical to early detection. According to the ACS, whereas the five-year relative survival rate for all cancers is approximately 62%, the relative survival rate for currently screened cancers (i.e. including cancers of the cervix, breast, colon, rectum and skin) is approximately 82%. ACS estimates that the relative survival rates of these screened cancers could be further increased to 95% if all Americans were regularly screened for these cancers. In 2002, the National Institutes of Health (“NIH”) estimated the overall costs for cancer-related illness in the U.S. to be $171.6 billion.

      The market for cancer diagnostics is expected to grow substantially due to the increased incidence of cancer, an aging population, early cancer awareness, pressure to reduce cancer mortality rates and improvements in healthcare screening systems. The existing cancer diagnostics market is characterized predominantly

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      While some of the underlying causes of specific cancers can be traced to a single genetic alteration, it is now believed that multiple complex genetic changes underlie the development of the vast majority of cancers. However, the identification of genetic anomalies alone is unlikely to prove clinically significant as many genetic events may have minimal or no impact on a patient’s health, whereas others may pose life-threatening health risks. Determining the interrelationship of genes and proteins, and their interaction with one another will be as important as understanding the underlying cause of the genetic change itself. The scientific community’s knowledge of these underlying genetic factors has only recently come about through the development of more sophisticated research and discovery tools, investment in mapping of the human genome, and development of bioinformatics capabilities to assess the clinical relevance of these genetic abnormalities.

      In recent years, novel molecular oncology tests have been introduced to provide additional clinical information previously unavailable to assess an individual’s predisposition or lifetime risk of developing certain cancers. Molecular tests are also used to screen and assist in the diagnosis of the presence of disease, to assess patient prognosis and outcome more accurately, to guide therapeutic selection in the management of certain cancers and to monitor for disease recurrence. Molecular tests offer the promise of providing a more accurate, disease-specific understanding of cancer to best address the needs of medical practitioners.

Cervical Cancer

      Cancer of the uterine cervix, or cervical cancer, is second only to breast cancer as the most common form of malignancy in both incidence and mortality worldwide. According to World Health Organization (“WHO”) the worldwide incidence of cervical cancer in 2000 were 470,606 with a mortality rate of 233,372. In parts of the developing world, cervical cancer is the major cause of death in women of reproductive age. The American Cancer Society estimates that in 2003 approximately 12,200 cases of invasive cervical cancer will be diagnosed in the United States with an estimated 4,100 deaths.

      Invasive cervical cancer spreads from the surface of the cervix to tissue deeper in the cervix or to other parts of the body. Cervical cancer develops in stages over a period of time beginning with pre-invasive changes that eventually progress to invasion. Because of the progression to invasion, most deaths due to invasive cervical cancer can be prevented with early-stage detection and treatment. Early detection is critical in promoting patient wellness. The more advanced the cancer, the lower the chances are of managing and/or curing the patient. Thus, regular cervical screening examinations are recommended in the United States and many foreign countries.

The Conventional Pap Smear

      The conventional Pap smear is currently the most widely used screening test for cervical cancer. This test was developed by Dr. George N. Papanicolaou in the 1940’s and has essentially remained unchanged until the advent of liquid-based cytology and automated computer primary screening. The Pap smear detects pre-cancerous lesions before they invade the cervix while they are 100% curable. It is estimated that clinical laboratories in the United States perform over 50 million Pap smears annually. We believe that annual test volume outside of the United States is in excess of 80 million. Of the 50 million annual Pap smear tests performed in the United States, industry sources estimate that approximately 2.5 million, or five percent, are diagnosed at the pre-cancerous or cancerous stage.

      In the United States, although widespread and regular use of the conventional Pap smear has contributed to a greater than 70% decrease in deaths resulting from cervical cancer, the death rate from the disease has declined at a rate of only approximately 1.6% per year. We believe that despite the success of the conventional Pap smear as a diagnostic tool, there are practical limitations to this test which contribute to in excess of $5.0 billion in annual costs. These costs are associated with the treatment of advanced pre-cancerous and

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      The evaluation of conventional Pap smears involves the science of cytology, which includes the microscopic evaluation and interpretation of pre-cancerous and malignant morphological changes in cells. The process begins with the collection of cervical cells during a gynecologic pelvic examination. To obtain a Pap smear, a clinician uses a sampling device to scrape the surface of a woman’s uterine cervix to collect a sample of cervical cells. If the conventional Pap smear method is used, this sample is smeared onto a microscope slide and the sampling device is discarded. If our SurePath liquid-based method is used, the collection device itself is placed into a vial containing our transport and preservative solution and the cells are suspended in this liquid medium.

      After the cervical sample is taken, the sample and patient information are sent to a clinical laboratory for further processing, screening and diagnosis. A cytotechnologist who is specially trained to evaluate cell changes screens and interprets the slide using a microscope. Any abnormality is further reviewed by a medical doctor or pathologist.

      Typically, about 90% to 95% of all Pap smears are classified as normal. Pap smears classified as other than normal specify the degree of abnormal change. For example, atypical cells, commonly referred to as “atypia,” represent the least significant change with a very low likelihood to progress to cancer if left untreated. They are generally classified as “ASCUS-US”, which refers to atypical squamous cells of undetermined significance; or “ASC-H”, which refers to atypical squamous cells-cannot exclude a high-grade lesion. The next classification is “LSIL”, which is defined as low-grade squamous intraepithelial lesions, encompassing HPV/mild dysplasia/ CIN 1 which has a slightly higher likelihood of progressing to cancer if left untreated but overall is still relatively low. “CIN” refers to cervical intraepithelial neoplasia, and is categorized as CIN 1, CIN 2, and CIN 3. “HSIL”, defined as high-grade squamous intraepithelial lesions, encompassing moderate and severe dysplasia, CIN 2 and CIN 3, represents changes that biologically have the highest likelihood of progressing to cancer if left untreated. The most serious classification is the diagnosis of cancer itself. Optimally, the Pap test’s objective is to detect the atypical to HSIL lesions as well as early invasive cancer so the lesion can be treated and the patient cured.

Limitations of the Conventional Pap Smear Test Process

      Each Pap smear slide sample typically contains 50,000 to 300,000 cervical cells. The process of manually screening and interpreting a conventional Pap smear requires intense visual examination of the slide sample through a microscope. Because abnormal cells are not always visible, errors may occur and abnormal cells may not be seen by the cytotechnologist during the microscopic review process. Abnormal cells can be obscured by blood, mucus or white blood cells making them difficult to find and interpret. Other factors such as air-drying distorts the cells, resulting in normal cells being misinterpreted as abnormal, or abnormal cells being misinterpreted as normal. Most of these limitations are a result of poor specimen quality and have been shown to be minimized by using a liquid-based collection method.

      Pap smears also have a highly variable false-negative rate. A false-negative results when the patient actually has evidence of disease but the Pap smear is reported as negative. False-negative rates of the conventional Pap smear vary widely among laboratories and have been reported to range from 2% to 28% according to studies at both Mercy Hospital in Janesville, Wisconsin and at Newport Hospital in Rhode Island. Factors that contribute to false-negative results vary but have been shown to depend on the skill and experience of the practitioner who collects the sample and prepares the slide. Studies actually suggest that the highest percentage of false-negative diagnoses are the result of inadequacies in sample collection and slide preparation. In this situation, the abnormal cells are either not collected properly on the sampling device or are collected properly on the sampling device but are not transferred properly to the microscopic glass slide. Other causes of false-negatives are attributable to detection and interpretation errors where abnormal cells are present on the Pap smear but they are either not seen at all, or are seen but interpreted as negative.

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      A study published in 1992 in the Acta Cytologica reported that, with a conventional Pap smear, as much as 80% of the sample taken from a patient may not be transferred to the slide and remains on the discarded collection device (Hutchinson M Patten FW, Stetzer GT, et.al.). In addition to inadequate cell transfer, the conventional Pap smear slide preparation process may produce inconsistent and non-uniform slides with extreme variability in quality, often making examination difficult. If a Pap smear is interpreted as unsatisfactory or less-than-optimal because of poor quality sampling or because of obscuring factors, the clinician may be prompted to call the patient back for a repeat test.

      When using the conventional Pap smear process, a physician is unable to perform additional testing using the original patient sample. If additional testing is required, the patient must return to the physician’s office to provide a second sample. This can cause a great deal of stress to the patient, thereby reducing the accuracy of the second sample. The SurePath liquid collection method allows the laboratory access to the remaining cellular material from the original patient sample. Repeat and ancillary testing from the residual cell solution may provide a more cost effective patient management program for inconclusive Pap smear tests, and may reduce a patient’s stress and anxiety associated with repeat testing.

      Due to the inherent limitations of the Pap smear screening process, a number of notable lawsuits were filed in the 1980s on behalf of women who died of cervical cancer and whose Pap smears, initially classified as normal, were subsequently determined to contain abnormal cells and, if classified differently, may have led to treatment that would have prevented death. These actions raised medicolegal concerns related to the inherent false-negative rate of Pap smears (reported in the range of 10%-45% by the Clinical Preventive Services, U.S.) resulting in a significant increase in the number of Pap smears categorized as either ASCUS, AGUS or LSIL. Consequently, the number of colposcopy procedures increased dramatically leading to increased health care costs as up to 80% of the procedures performed do not uncover underlying HSIL or cancer. To respond to address this need, tests for the detection of human papilloma virus have become increasingly utilized for women with ASCUS pap results.

Human Papilloma Virus

      HPVs comprise a group of more than 70 types of viruses. Certain (non-cancerous) HPV types cause the common warts that grow on hands and feet and those that develop in the mouth and genital areas. Genital HPVs can be passed from one person to another through sexual intercourse and oral or anal sex. Certain genital HPV types, called “high risk” HPV types and include HPV-16, HPV-18, HPV-31, HPV-45, as well as some others, can cause the growth of abnormal cells in the cervix that could potentially lead to the development of invasive cervical cancer. In fact, it has been documented that nearly all cervical cancers (99.7%) are directly linked to previous infection with one or more of the oncogenic (cancer-inducing) types of HPV (Judson 1992; Walboomers et. al. 1999).

      Whereas the vast majority of cervical disease can be traced to an underlying HPV infection, identification of infection, even with a high-risk type, is not in and of itself predictive. HPV is the most prevalent sexually transmitted infection in the world, occurring at some point in up to 75% of sexually active women (Groopman 1999). Although HPV infection is widespread, few people even know they are infected because they seldom have noticeable symptoms. While women usually are infected shortly after they become sexually active in their teens, 20s or 30s, progression to cervical cancer generally takes place over a period of 10 to 20 years. In rare instances, some early lesions can become cancerous over a shorter time interval such as a year or two.

      It is estimated that for every 1 million women infected, about 10% will develop pre-cancerous changes in their cervical tissue (dysplasia). Of these, about 8% will develop early cancer limited to the outer layers of the cervical cells (carcinoma in situ or “CIS”) and roughly 1,600 will develop invasive cancer unless the pre-cancerous lesions and CIS are detected and treated. Finally, women with active infection can transfer the virus to their newborn (vertical transmission) during delivery, which can result in papilloma virus infection in the neonate and possible subsequent laryngeal papillomatosis (Cason, Rice and Best 1998).

      In most cases an active infection is controlled by the immune system and with time becomes dormant; however, it is not possible to predict whether or when the virus will become active again. For example, one recent study followed more than 600 female university students who were tested every 6 months (Groopman

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Limitations of HPV Testing

      Over the past three years, HPV testing has gained clinical acceptance in the U.S. for supplemental testing of women for whom the results of primary cervical cytologic screening are atypical (ASCUS-US) but of uncertain significance and not clearly diagnostic of pre-malignant or malignant disease. Supplemental testing with HPV provides guidance as to how these patients should be managed. A negative HPV test is highly predictive of the absence of pre-malignant or malignant cervical disease and, therefore, is said to warrant no further action. A positive HPV test is said to warrant further examination including colposcopy. HPV infection rates in young women, i.e. less than 30 years of age, have been shown to be as high as 80% in certain populations thereby limiting the utility of the test for women of all ages. In addition, the high positive rate in women with a cytology diagnosis of LSIL limits the value of the test in this subset of patients, as well.

      Attempts have been made to promote HPV testing without concurrent examination of cervical cytology as a primary screening tool for cervical cancer in some countries outside the U.S. where the infrastructure to interpret cervical cytology slides is lacking. This approach is unlikely to be utilized in the U.S. and other markets where cytology screening capability exists, particularly given the high prevalence of HPV in women less than 30 years of age.

      In the U.S., the FDA is currently reviewing a submission by Digene® Corporation, the manufacturer of the only currently FDA approved test for HPV, called the Digene Hybrid Capture® HPV Test, for expanded claims to include an indication to use HPV testing in conjunction with cervical cytology for primary screening for cervical cancer in women over the age of 30. Recent prospective trials conducted by the National Cancer Institute suggest that routine screening of HPV DNA combined with cytology would result in the greatest detection of cervical dysplasia. However, while a negative HPV test result is highly predictive of the absence of pre-malignant or malignant cervical disease, the predictive value of a positive HPV test result may be limited because HPV testing cannot distinguish non-progressive infection from infections that would benefit from therapy.

Breast Cancer

      With an estimated incidence of over one million new cases per year, cancer of the breast is the most common women’s cancer in the world accounting for 22% of all new cases diagnosed. On a worldwide basis, breast cancer is the leading cause of cancer mortality in women representing an estimated 14% of all cancer-related deaths in females.

      The American Cancer Society estimates that in 2003, approximately 211,300 new cases of invasive breast cancer will be diagnosed among women in the United States, with an estimated 40,200 women dying of the disease. Breast cancer incidence increases with age, and although significant progress has been made in identifying women considered to be at high risk of developing the disease, more than 50% of breast cancer occurs sporadically in women with no known risk factors. According to the National Cancer Institute (“NCI”), the overall five-year survival rate for women diagnosed with breast cancer is 86%. Early detection is paramount as the relative survival rates vary significantly among localized disease (96.8%), regional spread (78.4%) and distant metastases (22.5%).

Breast Cancer Screening

      Breast cancer screening is currently defined as a combination of patient self-exam, clinical breast exam and mammography. These methods are complementary and are not used as stand-alone techniques. Film imaging mammography is the gold standard for breast cancer screening and currently represents the most effective means of early detection of breast cancer with a sensitivity ranging from 54.0% to 94.0% and a specificity ranging from 83.0% to 98.5%. More specifically, studies show that mammography sensitivity ranges

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      According to data from the 2000 Behavioral Risk Factor Surveillance System (“BRFSS”), the percentage of U.S. women aged 40 and older who had a recent mammogram was 62.6%. Of the 32.5 million screening mammograms currently performed in the U.S., approximately 4 million indicate some form of abnormality requiring further follow-up. Once an abnormality is detected on initial screening, the need for a very sensitive and specific assay to detect early breast cancer becomes critical. Although follow-up diagnostic imaging and ultrasound may provide greater image clarity, neither is able to distinguish between a benign condition and a malignancy. Of the estimated 1.2 million breast biopsies performed in the U.S., roughly 80% yield no form of malignancy resulting in an estimated cost of $3.3 billion related to unnecessary biopsies.

Breast Cancer Staging and Treatment

      Once breast cancer is diagnosed, it is staged, (i.e. I, II, III or IV) based on a number of factors including tumor pathology (“T”), nodal involvement (“N”) and distant metastasis (“M”). In the U. S., approximately 55% to 60% of newly diagnosed invasive breast cancer is detected at a relatively early stage (i.e. small tumor size and with no or minimal nodal involvement).

      Although the “TNM” classification system is useful in staging patients for follow up and treatment, it is based solely on the morphologic features of the tumor and its degree of spread and, thus does not take into consideration the biologic make up of the cancer. The clinical course of primary breast cancer varies from patient to patient. Predicting which individuals are cured and which are not remains difficult for both lymph node negative and lymph node positive breast cancer patients. Clinicians are well aware that some patients who have poor TNM scores have long disease-free survival times, whereas others with good TNM scores experience a rapid deterioration with early recurrence of breast cancer followed by death. At best, current prognostic indicators serve as guides for clinical decisions that require considerable judgment.

      Once the cancer is staged, treatment decisions are typically made by an oncologist in consultation with the patient and will take into consideration the patient’s age and preferences, as well as the risks and benefits associated with each treatment protocol. Nearly all women with breast cancer will have some form of surgery combined with other treatments such as radiotherapy, chemotherapy, hormone therapy and/or monoclonal antibody therapy. Prognostic tests for the determination of estrogen receptor (“ER”), progesterone receptor (“PR”) and her2/neu status have become standard of care for selecting subsets of patients most likely to benefit from certain hormone and monoclonal antibody therapies.

Post-Therapy Recurrence

      In general, it has been widely assumed that early detection of any cancer, whether as a new primary malignancy or as a recurrence, leads to more effective therapy. As with screening, the ability to detect small tumors and early progression in asymptomatic situations is paramount to positive outcomes. However, the recurrence rate can be as high as 25% to 30% within the first five years after diagnosis, even in patients with good TNM scores.

      Presently, a large number of markers exist for the monitoring of breast cancer. These include MUC-1 (CA15-3), carcinoembryonic antigen (“CEA”), oncoproteins, milk proteins and cytokeratins. Of these, CA15-3, CA27.29 and CEA are the most commonly used. According to the American Society of Clinical Oncologists, (“ASCO”) Tumor Marker Guidelines, the performance of these markers range in sensitivity for Stage I disease of 9% to 10%, Stage II of 19% to 54%, Stage III of 31% to 54% and Stage IV of 64% to 75%. Additionally, ASCO notes that CA15-3 exhibits a limited sensitivity for detecting low tumor burden, when treatments are most likely to be beneficial. Currently, only 20% to 30% of recurrences are detected before the onset of symptoms.

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Ovarian Cancer

      Ovarian cancer is only the seventh most common cancer in women with an estimated 192,379 cases diagnosed worldwide in 2000, but it is among the most deadly. In the U.S., the five-year relative survival rate is only 53% for all women diagnosed with ovarian cancer. According to the NCI, the five year relative survival rate for localized ovarian cancer is 94.9%, but only 81.4% if the cancer has spread regionally, and only 30.9% for women with distant metastases.

      Ovarian cancer has been shown to be a clonal disease in approximately 90% of cases suggesting that most cancers could, in fact, be detected before they have metastasized. Due to the lack of an adequate screening test, and to the fact ovarian cancer is asymptomatic until the cancer has progressed to a late stage, approximately 75% of newly diagnosed patients are in advanced to late stages III and IV.

Ovarian Cancer Screening

      The effectiveness of routine screening of asymptomatic women using pelvic examination, abdominal or vaginal ultrasound or serum carcinoembryonic antigen (CEA-125) has not been established. The ACS recommends annual pelvic examinations for women starting at age 18 or at the onset of sexual activity. In 1994, a National Institutes of Health Consensus Conference on Ovarian Cancer concluded that there is no evidence that screening with current available modalities, including CEA-125 and/or transvaginal ultrasound can be used effectively to decrease ovarian cancer mortality or morbidity.

      Currently, screening for ovarian cancer typically occurs in one of the following settings:

	•	Women considered at high risk for developing ovarian cancer. The ACS states that women who are at high risk of epithelial ovarian cancer, such as those with a very strong family history of the disease, may be screened annually using transvaginal ultrasound and/or CEA-125.
	•	Presence of adnexal (ovarian) or pelvic mass. In the United States the hospitalization rate for ovarian neoplasms is reported to be as high as 289,000 women annually. Roughly 80% to 90% of these women will have a surgical procedure to rule out and/or diagnose ovarian cancer. An even greater number of women are found to have an adnexal or pelvic mass during a routine physical examination or during evaluation for another complaint.

      A successful screening program aimed at the early detection of ovarian cancer would require that major abdominal surgery (laparoscopy and/or laparotomy) be performed, as this is the only means of a definitive diagnosis. Because of the low incidence of ovarian cancer and the necessity of major abdominal surgery, a screening program requires high accuracy with a high specificity to minimize morbidity associated with major abdominal surgery.

Colorectal Cancer

      In 2000, there were an estimated 445,963 cancers of the colon and/or rectum diagnosed in women, making it the third most common female malignancy worldwide according to the WHO. Colorectal cancer also ranks as one of the more deadly cancers attributable to over 237,000 cancer-related deaths in women worldwide. In the U.S., the ACS estimates that almost 75,000 women will be diagnosed with colorectal cancer in 2003, and an estimated 28,000 will die of the disease this year.

      Similar to most cancers, survival rates for colorectal cancers can be very high if detected at an early stage (i.e. the five-year relative survival rate for localized disease is 90%). Unfortunately, only 37% of colorectal cancers are detected before the cancer has spread. Once the cancer has spread to the regional nodes, the relative survival rate is only 65% and for distant metastases, the survival rate drops to 9%.

Colorectal Cancer Screening

      The primary risk factor for developing colorectal cancer is increasing age with more than 90% of cases diagnosed in individuals over the age of 50. Screening can prevent the occurrence of colorectal cancer by

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	•	Yearly fecal occult blood test plus flexible sigmoidoscopy every five years
	•	Flexible sigmoidoscopy every five years
	•	Yearly fecal occult blood test
	•	Colonoscopy every ten years
	•	Double contrast barium enema every five years

      Although the fecal occult blood test is the least invasive method and most amenable to widespread screening, it has significant drawbacks including low sensitivity (ranges from 35% to 40% for detecting of colorectal cancer) and poor patient compliance.

Malignant Melanoma

      Although melanoma accounts for only a fraction of all skin cancers diagnosed, it is by far the most serious. Unlike the more common and curable basal cell and squamous cell skin cancers, melanoma accounts for roughly 75% of all skin cancer-related deaths. In 2000, the WHO estimated that 67,425 cases of melanoma were diagnosed in women and 17,045 female deaths were attributable to this deadly disease. In 2003, in the U.S., an estimated 24,300 women will be diagnosed with melanoma and 3,600 are expected to die of the disease.

      The overall five year relative survival rate of patients diagnosed with melanoma is 89% according to the ACS. Because melanoma develops from biological changes in pigmented lesions such as moles, early signs of melanoma development can usually be seen through changes in the size, color or texture of the lesion. As a result, about 82% of melanomas are diagnosed at an early or localized stage where the five-year relative survival rate approximates 96%. Survival rates drop considerably to 60% and 14% for melanomas that have spread to regional nodes or to distant organs, respectively.

Melanoma Staging and Treatment

      Once melanoma is suspected, the lesion and surrounding tissue are excised. Once diagnosed, biopsy of the surrounding (sentinel) lymph nodes is common to determine the degree of spread of disease. Like most cancers, melanomas are staged, i.e. I, II, III or IV, based on a number of factors including tumor pathology (“T”), nodal involvement (“N”) and distant metastasis (“M”). Prognostic factors such as tumor thickness (Clark Score), mitoses and ulceration are among the criteria used in tumor grading. Although the TNM classification system is useful in staging patients for follow up and treatment, it is based solely on the morphologic features of the tumor and its degree of spread and, thus does not take into consideration the biologic make up of the cancer.

      Predicting which individuals are cured and which are not remains difficult, as up to 20% of individuals with thin lesions may relapse within 5 years. Clinicians are well aware that some patients who have poor TNM scores have long disease-free survival times, whereas others with good TNM scores experience a rapid deterioration with early recurrence of melanoma followed by death. At best, current prognostic indicators serve as guides for clinical decisions that require considerable judgement.

      In addition to the standard treatment for malignant melanoma, which includes adequate excision of the primary tumor and may require removal of surrounding lymph nodes, advanced cases are treated with chemotherapy or immunotherapy. Although a number of markers have been studied to determine their utility in predicting which patients with early stage disease have biologically aggressive disease and, therefore should be treated more aggressively, determination of melastatin mRNA expression levels appears to be the most promising.

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Our Products

The i³ Series Product Line

      Our i³ Series product line of cervical cytology products is intended to address the current limitations of the conventional Pap smear process and the lack of automation in the cytopathology laboratory. The products within our i³Series product line work together as part of an integrated system for the collection, preparation, staining and computerized analysis of liquid-based, thin-layer Pap preparations and the screening of conventional Pap smears. The silent exponent “3” suggests the expertise contributed by each of our three predecessor companies, AutoCyte, NeoPath and NSI, as well as the value of these component products in providing intelligent identification through innovation. Within the i³ Series line, individual products have been renamed to better communicate the value they provide to the physician, patients and laboratory professionals. Our i³ Series line of cervical cytology products includes the SurePath Test Pack, a proprietary, liquid-based cytology sample collection, cell preservation and transport system, the PrepStain slide processor, an automated slide preparation system that produces slides with a standardized, thin layer of stained cervical cells, and the FocalPoint Slide Profiler which utilizes proprietary technology to distinguish normal liquid-based or conventional Pap smears from smears that have the highest likelihood of abnormality.

The SurePath Test Pack

      Our SurePath Test Pack consists of a sample collection vial, proprietary preservative solution and sample collection device. During a clinical exam, a physician or nurse will collect a sample of endocervical and ectocervical cells, currently using a cervical broom collection device. Once collected, the health practitioner detaches the removable head of the collection device and places it into the vial containing our proprietary SurePath preservative fluid, thereby retaining 100% of the cells collected. The lid of the vial is then fastened and the vial is then transported to the clinical laboratory for follow-on processing on the PrepStain system.

      Although SurePath has been FDA-approved for use with a cervical broom collection device, we initiated clinical trials in the third quarter of 2002 to evaluate the safety and efficacy of alternate sample collection devices, including the cervical spatula and cervical brush. We hope to receive FDA approval for clinical use of these alternative collection devices in the second half of 2003. There can be no assurance, however, that such approval will be obtained during the second half of 2003, or ever, nor that if approved, there will be widespread market acceptance of the alternate devices contemplated by our clinical studies.

      In July 2002, Digene Corporation (“Digene”) informed us that it had received a “not approvable” letter from the FDA for its Pre-Market Approval Supplement application to use SurePath as a specimen collection medium for its Hybrid Capture® 2(hc2) HPV DNA Test. We are working with Digene and the FDA to resolve the issues identified in the letter. Although we will be collecting and submitting clinical additional data to the FDA, we remain hopeful that resolution of the issues identified by the FDA will not alter our expectations for approval in late 2003. There can be no assurance, however, that we will succeed in resolving the issues raised by the FDA, nor in gaining approval for the combined use of our products from the FDA.

The PrepStain System

      Our PrepStain system consists of proprietary reagents, plastic disposables and automated equipment for preparing a thin-layer of cervical cells on a SurePath microscope slide. Once received in the laboratory, the sample is thoroughly mixed, resulting in a randomized cell suspension which is removed from the vial and layered onto a proprietary liquid density reagent in a plastic centrifuge tube using our patented syringe device. Batch centrifugation is then conducted on the cell suspension to remove excess blood, inflammatory cells and other debris from the sample.

      Once centrifugation is completed, the laboratory technician places the tube containing the separated diagnostic cells onto an automated pipetting system. This pipetting system then distributes the cervical cells in a thin-layer on the microscope slide. At this stage, discrete staining of the slides can be carried out by the PrepStain system, or staining can be performed off-line from the PrepStain using alternative staining instrumentation. PrepStain is currently capable of preparing approximately 48 discretely stained or 96

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      We have also developed an automated accessory to the PrepStain system called PrepMate that reduces the number of manual preparation steps required on the PrepStain system. The PrepMate accessory is intended to reduce the time required to prepare samples for processing on the PrepStain instrument. The FDA approved PrepMate for use in the U.S. in May 2001.

      We believe that SurePath and PrepStain offer the following advantages over the conventional Pap smear process:

	•	More Complete Sample Collection. Because the clinician places the collection device directly into the SurePath vial, the entire patient sample is contained in our preservative fluid. In a conventional Pap smear process, as much as 80% of the cervical sample can be inadvertently discarded with the disposable collection device after smearing the sample onto the slide.
	•	Improved Sample Quality. By eliminating variations in preparation techniques and the fixative spraying step from the sample collection process, PrepStain virtually eliminates air-drying, generates a more complete fixation, and provides a more standardized preparation process in a controlled, laboratory environment. This more uniform cell sample distribution also reduces cell clumping and obscuring from debris.
	•	Automated and Discrete Staining Function. PrepStain includes a discrete, or individualized, slide staining function performed by a computer-controlled robotic pipetting station. Unlike conventional Pap smear slides that are often manually stained in a batch process using common reservoirs of staining reagents, PrepStain’s staining reagents are directly applied to individual slides. As a result, staining reagents are not shared among slides. We believe this reduces the risk of cross-contamination among cell samples that can lead to inaccurate diagnoses.
	•	Staining Flexibility. In early 2003, we introduced a minor modification to the PrepStain system that allows the system to be used for cell transfer, slide preparation and staining or for the cell transfer and preparation of slides that may be further processed using a laboratory’s existing free-standing automated slide staining system. This provides flexibility and facilitates the integration of the system into laboratories whose workflow is organized around a free-standing automated staining system.
	•	Multiple Testing Capability. Because our proprietary SurePath preservative system enables the patient sample to be preserved for four weeks at room temperature and six months if refrigerated, it permits, if necessary, preparation of several slides from a single sample. We believe that the ability to perform adjunctive slide-based tests using a single sample, together with the improved quality of the slide itself, will reduce re-testing expenses typically associated with inconclusive Pap smear tests. We will evaluate use of the residual patient sample for other diagnostic protocols such as HPV testing, infectious disease testing and application of specific tumor markers. Residual sample testing will require FDA approval if and when such testing is determined to be viable.

FocalPoint Slide Profiler (formerly AutoPap Primary Screening System)

      The FocalPoint Slide Profiler is an automated, computerized primary interpretation system designed to distinguish between normal and abnormal Pap smears. FocalPoint was approved by the FDA in May 1998 as a primary screening device for conventional Pap smear slides. In October 2001, the FDA approved the use of FocalPoint as a primary screening device for our SurePath thin-layer slides prepared by PrepStain. FocalPoint uses visual intelligence algorithms to improve accuracy in the primary screening of conventional Pap smear slides and our SurePath thin-layer slides. As approved by the FDA, FocalPoint identifies up to 25% of slides as “within normal limits” and requiring no further review (also referred to as “sort rate” or “no further review rate”). Cytotechnologists then manually screen the remaining slides with the assistance of FocalPoint’s ranked review report. This ranked review report shows the relative scores of the remaining processed slides. At least 15% of the highest-ranking slides that are classified normal by manual review then undergo quality control re-

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      FocalPoint works with a range of staining procedures used on conventionally-prepared Pap smear slides. FocalPoint analyzes a Pap smear in about five to six minutes, holds 288 Pap smear slides at once, is easy to load and unload and can operate continuously with minimal intervention for up to 24 hours per day. We provide each clinical laboratory with on-site training, system documentation, a comprehensive quality assurance program and ongoing customer and technical support.

FocalPoint GS

      In the fourth quarter of 2000, we launched FocalPoint GS, the next generation FocalPoint system for use outside the United States. FocalPoint GS uses Location Guided Screening to further improve the screening process by automating the microscopic analysis of SurePath thin-layer slides or conventional Pap smears designated for further review by the FocalPoint Slide Profiler. FocalPoint GS integrates our SlideWizard technology into the FocalPoint screening process. The FocalPoint instrument is interfaced to our SlideWizard platform and networked to one or more commercially available microscopes that have been equipped with computer-controlled automated stages for fast relocation of “fields of interest” on microscopic slides. During the initial screening process, and for each slide screened, FocalPoint GS identifies and stores a pre-set number of “fields of interest” in which it has calculated a higher probability of abnormality. As with the FocalPoint Slide Profiler screening process, FocalPoint GS identifies up to 25% of slides as “within normal limits” for which no further review is required. For each of the remaining slides, FocalPoint GS communicates the location coordinates of the “fields of interest” to the computer controlled microscope stage via the SlideWizard platform. The “fields of interest” are electronically highlighted and located for easy identification. This facilitates a focused microscopic review and allows the cytotechnologist to quickly analyze the slide for the presence of cellular abnormality. Abnormal findings thus identified can be confirmed by full microscopic review. If no abnormality is identified during this rapid cytologic assessment, no further review is required.

      We believe the established quality of the FocalPoint algorithms, coupled with the highly focused nature of location-guided screening, allow laboratories to improve quality, increase capacity by up to 200% and alleviate backlogs and/or labor shortages. To date, the FocalPoint GS has been used to screen over 2 million slides outside of the U.S.

      In early 2003, we initiated U.S. clinical trials under a binding protocol with the FDA, to obtain data to support an application for U.S. approval of FocalPoint GS. We anticipate the FocalPoint GS trial to be completed by the middle of 2003 and a submission will be filed with the FDA shortly thereafter. There can be no assurance that any of these proposed products will demonstrate clinical efficacy or receive the required regulatory approvals.

SlideWizard Product Line

      Our SlideWizard product line consists of PC-based applications focused on the quantification of the nuclear DNA content of cells and the detection and quantification of specific molecules in cells or tissue sections (immunohistochemistry and immunocytochemistry assays), the management and archiving of images and patient information, the exchange of data via telepathology and the creation of comprehensive reports combining color images and patient data. Our SlideWizard line of products include:

	•	Telepathology Module: a module for the transmission and interpretation of high-resolution images captured at remote sites for teaching and research;
	•	Quantitative Image Cytometry-DNA: performs quantitative analysis of DNA by quantifying nuclear texture and morphology;
	•	Quantitative Image Cytometry-Immuno: offers general purpose image analysis that is ideal for recognition and quantification of virtually any stain application on a variety of biologic materials;

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	•	A system to quantitatively assess the amount of up to three different absorption stains within the same microscopic slide, with some of the stains normally being related in a quantitative way to specific marker expressions;
	•	ImageTiter, a method to quantitatively measure abnormally high levels of antinuclear antibodies through “titration emulation” as indication for a variety of immune system problems; and
	•	SlideWizard, an electronic dotting and labeling system.

      In November 1995, we received 510K clearance by the FDA to market the ImageTiter for automating antinuclear antibody testing. Our DNA and immuno-quantification applications are presently offered “For Research Only” in the United States. A SlideWizard workstation is also a component of the FocalPoint GS system that is currently sold only outside the United States. We expect to develop additional applications or modules in the field of tissue diagnosis and prognosis to run on the proprietary SlideWizard platform. We may elect to pursue regulatory clearance to market in the United States for additional SlideWizard applications currently under development or developed by us in the future.

Molecular Diagnostics Products

      We are developing oncology products and services under our collaboration with BD. These products and services will be based upon genomic and proteomic markers identified through discovery research conducted at Millennium under its existing research and development agreement with BD. TriPath Oncology is clinically validating and will be developing these proprietary cancer markers into commercial diagnostic and pharmacogenomic oncology products and services. Commercial responsibilities for resulting products will be shared between BD and TriPath Oncology. BD will continue to fund additional discovery research activities at Millennium, at least through the end of their agreement in early 2004, aimed at developing and commercializing molecular diagnostics and pharmacogenomic products and services for malignant melanoma and cancers of the cervix, breast, ovary and colon.

      We are currently focused on developing molecular diagnostic and pharmacogenomic products and services for cancers of the cervix, breast, ovary and colon. Though we will discuss our expectations for our molecular diagnostic products throughout this section, there can be no assurance we will be successful in developing any products or services that will prove to have any clinical or therapeutic value to the healthcare system nor that we will be able to develop such tests in an economically viable way.

Cervical Staging Assay

      The focus of the cervical oncology program is to develop and commercialize highly sensitive and specific novel gene/protein targets for the direct detection of pre-invasive high-grade disease (CIN2/3 and CIS) and invasive cervical cancer independent of age and HPV infection status. We will initially seek an indication for use to detect the presence of pre-cancerous disease and cervical cancer in women, regardless of age, who have tested positive for HPV when the HPV test is performed as part of a primary screen for cervical cancer and/or in women who have been diagnosed with ASCUS or LSIL by cytologic screening. By attaining a high level of clinical performance for both sensitivity and specificity, we believe that the resulting assay may improve the predictive value of both HPV and cytologic screening and, as a result, will reduce false-positive referrals to colposcopy while maintaining a high level of detection of high-grade disease and cervical cancer as compared to the current clinical standards. Addressing this medical decision point could lead to a substantial cost savings for the health care system (estimated at up to $2.3 billion per year) as well as a reduction in morbidity and discomfort associated with unnecessary medical procedures.

Breast Cancer Screening Assay

      We are completing the discovery phase and early development of reagents for screening of breast cancer. This test will be a blood based, quantitative immunoassay targeted at the identification of multiple proteins specific for early stage breast cancer. We believe that by distinguishing those women who have an underlying

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Breast Cancer Staging Assay

      We are developing reagents for a slide-based test to quantify protein expression for multiple cancers for staging of breast cancer. This test will be formatted as a slide-based immunohistochemistry test that will utilize our proprietary SlideWizard system to quantify protein expression for multiple cancer markers. We believe that our breast cancer staging test will provide oncologists a more accurate approach to determine which patients are at highest risk of recurrence and require more aggressive treatment. Although a high percentage of early stage breast cancer patients are treated with adjuvant chemotherapy, a more accurate prediction of direct tumor behavior may help to guide the oncologists in their choice of therapies to administer.

Breast Cancer Monitoring Assay

      We will utilize cancer markers discovered through our breast cancer screening program to develop a blood-based breast cancer monitoring test for the detection of early recurrence. The goal of our breast cancer monitoring program is to clinically validate the cancer markers discovered for the breast screening panel to detect early stage breast cancer recurrence in asymptomatic patients. The test will be used to monitor patients for response to treatment and to detect early recurrence post treatment. We believe that these changes in patient management will be result in improved health outcomes and increased patient survival.

Ovarian Cancer Screening Assay

      We are completing the discovery phase and initiating development of a screening test for ovarian cancer. Our ovarian cancer screening test will be a blood-based immunoassay comprised of a panel of antibodies which will measure the expression of target proteins specific from early stage ovarian cancer. The test will be initially targeted for patients considered to be at high-risk patient for ovarian cancer, a market estimated at about 2 million cases per year in the U.S. Our ultimate goal is to validate the test as a means of routine screening of women aged 40 and older. By detecting ovarian cancer at an earlier stage of disease we believe that use of our test will lead to earlier initiation of treatment and increased patient survival.

Colorectal Cancer Screening Assay

      We are completing the discovery phase and initiating development of a screening test for colorectal cancer. The colorectal cancer screening test will be a blood-based immunoassay comprised of a panel of antibodies which will measure the expression of target proteins to detect early stage colorectal cancer. We believe that our test will detect the pre-cursor adenoma polyps as well as early stage colorectal cancer. We will target the test for individuals considered at high risk for developing colorectal cancer. We believe that the test could ultimately be used as a general screening test for men and women aged 50 and older. By detecting colorectal cancer at an earlier stage of disease we believe that use of our test will lead to earlier initiation of treatment and increased patient survival.

Melanoma Staging Product

      Through our agreements with BD and Millennium, we received distribution rights to a novel gene expression target for malignant melanoma shown in limited studies to be predictive of risk of metastasis in Stage I and Stage II melanomas. In February 2002, we executed a letter of intent to collaborate with AmeriPath, Inc., a leading national provider of cancer diagnostics, genomics, and related information, on the validation and clinical use of a novel gene expression assay for malignant melanoma. During 2002, AmeriPath developed and validated a “home brew” assay utilizing our novel Melastatin gene-based detection probe and our SlideWizard imaging and telepathology platform. We finalized this arrangement in late 2002 following the successful completion of a series of key development and validation milestones by the parties initiated during 2002. According to the terms of the agreement, we will supply AmeriPath with the novel gene-based probe

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      An ASR was used in a laboratory developed assay for melanoma staging at the end of 2002. The introduction of ASRs that may be used in laboratory developed assays, including staging and prognostic assays for cervical and breast cancer, is expected in 2004. The introduction of ASRs that may be used in laboratory developed assays for the early detection and monitoring of ovarian, breast, and colon cancer is expected in 2005. In the interim, we are investigating a number of potential strategic alliances to complement, accelerate and augment the activities arising from our collaboration with BD.

      We do not expect to generate any significant revenue from our molecular diagnostic products until 2005. Consequently, our oncology business unit will incur expenses in excess of revenues generated. Some of these expenses include the lease of several laboratories at BD’s facility in Research Triangle Park, North Carolina. This arrangement substantially ended in July 2002 after we occupied newly equipped laboratory and office space in Research Triangle Park. We do, however, maintain several small laboratories at the BD facility.

      In January 2003, we entered into an agreement with BMS to provide quantitative tissue based image analysis in support of BMS’ oncology therapeutics programs. The goal of the initial program will be to assess the pharmacologic effect of a therapeutic agent targeted at treating epithelial cancers, including cancers of the cervix, breast and colon. Under the terms of the agreement, we will utilize our SlideWizard image analysis platform and proprietary software applications to provide a quantitative assessment of tumor marker expression levels for tissue samples taken from patients enrolled in a Phase I clinical trial. The data we generate will be used to evaluate patient response across varied dosing levels based on changes in tumor marker expression levels, both before and after treatment.

      Finally, we believe that our automated visual intelligence technology can be developed for use for other diagnostic tests that involve microscopic analysis of biological specimens on glass slides, such as tissue, blood, urine, sputum or other samples. To develop our technologies for other applications, we will need to adapt software algorithms to analyze each of these other samples.

Marketing and Sales

Marketing Strategy

      As the development and commercial engine of one of the broadest based gene discovery programs in cancer diagnostics in the world, we have a unique opportunity to change the clinical practice of medicine by developing and commercializing novel, molecular oncology tests that pr